Real Estate Matters: Let your children repair their credit by their own effort

Ilyce Glink, For the Express-News

Updated 4:50 pm, Friday, February 3, 2012

Q: A few months ago, I purchased a Fannie Mae HomePath home at a great value, which I am renting to my daughter and her husband. I am able to rent to them at a price that helps their cash flow and credit repair process as they pay down other debt. And I make a little more interest on my investment (I paid cash for the home) than today's money market rates.

I want to sell my daughter and her husband the house at a very modest profit. But they are probably a good year away from getting their credit score up to an acceptable level.

I am not opposed to acting as the bank and doing an owner-financing contract. I am wondering if there is a company that can handle payment receipts, manage the escrow accounts and disburse tax payments, HOA fees and so forth, and report their progress to the credit bureaus. I'd prefer not to deal with that.

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A: There are two parts to your question. First, you have to decide whether you are better off as the owner of the home, as a contract seller or as a lender.

Those are your three options. Whatever you choose, you can make arrangements for your daughter to take care of all of the payments relating to the home.

If your daughter and her husband aren't very good at handling their finances, owning the home may not be right for them now. You might want to continue to lease the home to them until they get their act in order.

However, if they are savvy about credit and think they can handle the expenses of owning a home, perhaps now is the time to see if they can. You might reduce the rent but put them in charge of paying real estate taxes, homeowner association dues, and other expenses such as repairs. It would be up to them to make sure those payments got made on time, and that might help build up their credit history.

On a separate note, there are companies out there that would allow your daughter and her husband to keep track of all payments that go under the radar screen of most credit reporting bureaus. Since homeowner association dues, some utility company payments and rent payments aren't ordinarily reported to the credit reporting bureaus, people like your daughter and son and law might have a hard time building their credit.

Recent changes to the federal law now require lenders to consider alternative forms of credit in addition to a full credit reporting produced by Equifax, Experian or TransUnion. Consumers can build an alternative credit history consisting of information on how regularly they pay their rent or car payments or auto insurance. (Full disclosure: Ilyce Glink recently became a member of advisory board of one of these companies, eCredable.com.)

These companies in the alternative credit reporting space are trying to give consumers an alternative method of building their credit during these economic hard times. People who have lost their credit cards and homes, as well as young people who have just entered into the credit world, are finding fewer opportunities to build or rebuild their credit with the traditional credit reporting companies.

Newer credit reporting companies record recurring monthly payments to utility companies, phone and internet companies, landlords and other entities, even if those payments go to family members, in order to create a picture of a consumer that might be missed by traditional methods of credit analysis.

If your daughter and her husband are trying to improve their credit history, it will be up to them to take the steps necessary to make the payments from their own accounts. You won't and shouldn't be able to do it for them. If they are to repair their credit history, they have to do it themselves.

Should you lease or sell the home to them? From their perspective, it may not matter if they buy or rent the home from you as long as they handle the financial affairs relating to the home.

If you want to simplify your role, you can have them set up direct-deposit payments to you from their checking account on a monthly basis, which will make it easy for you to keep track of those payments in case you are asked to verify their payment history.

If you decide to sell them the home under a contract for sale for deed arrangement, make sure you hire an attorney to help you out. You'll want to be sure that you are protected no matter what happens.

Q: I purchased a townhouse with my aunt five years ago. She passed away last year, and I want to sell it. We paid cash for the house, and now it is worth about 35 percent less than when we bought it. I don't want to rent it. If I sell for a loss, can the difference be a write-off on my taxes?

A: If you purchased the townhouse as an investment, your loss might be a write-off on your federal income taxes. However, it sounds as if the townhouse was not used as a rental but was lived in by your aunt.

If you and she both owned the property and she used it as her primary residence, her share of the home would not be an investment in real estate and could not be deducted from her real estate taxes.

However, your share might be considered an investment. If your share in an investment, you might have the ability to take the loss. But your situation might be a tad complicated, so you might want to talk to an accountant.

If you have questions, you can call Ilyce Glink's radio show toll-free 800-972-8255 any Sunday, from 10 a.m.-noon, or contact her or Samuel Tamkin through her website, www.thinkglink.com.